As we've discussed, selection of securities or investments for a portfolio or funds, such as a mutual fund or an exchange-traded fund, can be done by active or passive management approaches. Active management in a stock fund, for example, means fundamental analyst, stock-picking, bond-picking, or the active adjudication of investment choice. The manager has to make a judgment of what investments to include stocks, or bonds, and so on. In passive management, a rule is set for what securities or investments to include or exclude, and the manager follows the rule. An S&P 500 index fund, for example, is passively managed. It is market cap weighted, it includes all stocks in the index weighted in exactly that proportion as the index itself. An ESG exclusionary screen is easiest to implement in a sense in a passive investing style. For example, a fossil free S&P 500 fund would have all the stocks in the S&P 500 index, perhaps, except for fossil fuel companies. A big advantage of passive investing, as we've discussed, is lower fees and thus potentially a better chance of being closer to the index and a lower probability of under-performance. This approach may also simply and straightforwardly incorporate investor values. For example, a Quaker investor may exclude, in a passive sense, the securities of defense contractors, which by the way, is an antecedent to the modern notion of ESG investing. We find some of the first collective investments in the US, were oriented toward the beliefs of Quakers in the Friends Movement for many years ago in the 1800s. Not all investors, however, care about a broad range of ESG issues. They might care about just a few or only one. One or more exclusionary screens, specified by an investor, allows her values to be applied directly to the choice of securities. Products can be custom targeted in other words to reflect this, in a structure known as separately managed accounts or other potential customization strategies that accommodate someone's specific preferences. The investor, in this case, gets only her ESG exposures or factors that she wants. If we look at the underlying data in the ESG investment universe from an investment perspective, it is a strong movement toward customization that we see. I expect, in the next five years or so that many investors will be able to meet not just their risk reward goals potentially, but also their ESG goals on a highly customized basis in part, relying on technology. This notion also can send a message to targeted companies and industries, although certainly not by negative screening, only by positive screening. Divesting from a targeted company or industry might affect their stock price conceptually, although practically, it turns out it's very challenging to do. In part, because of the strong and enlarged movement inflows that might be required, but it also sends a political message. We saw this in divestment from companies doing business in South Africa. The economic effect was judged, not to be very large purely from the investment pressure, but the moral suasion that was in place ultimately cost the movement. Today we see it in divesting from tobacco companies or fossil fuel producers. The companies and industries have to reckon with increasing market pressure, and possibly, isolation from capital due to social investor's unwillingness to own them. If this idea of divestment has teeth, then the cost of capital may change for these firms. Again, the academic is fairly thin when it comes to the idea of the divestment directly changing the way firms operate their businesses from a pure financial perspective. It looks, instead, like a positive screening in approach in which investors exert their voices through activism, through voting their shares, and engaging directly with management, or in the press with management has more effect. There's a risk of exclusionary screening making investing in certain strategies or asset classes impractical, or in fact, uneconomic. For example, with utilities. Now, pure inclusion. An inclusionary screen is meant to find investments to put in the portfolio, rather than keep them out. The investor or the manager, working on behalf of investors, will set the terms of the inclusion screen or screens, and then look through the universe of available investments in the asset classes appropriate to the investment to choose those that pass the screen. Then they have to decide what weights to give the positions. For example, an inclusionary screen for electric vehicles might include Tesla, which makes only electric vehicles, as well as General Motors, which makes some electric vehicles. Another approach may focus only on Tesla or other EV associated companies. The manager might decide to weigh Tesla more heavily because it has greater impact. It's the assessment or judgment of the investor, or the investor's managers, or fiduciaries, who are making these choices. Again, beauty is often in the eyes of the beholder. Active management can also be associated with out-performance, especially relative to a passive index. Of course, out-performance, while it may be the goal of investor's, can be turned around into under-performance in many cases. In fact, the academic evidence has long suggested that a typical active investment under-performs its associated asset class. Alpha, definitionally, is a return on an investment resulting from skill or manager's processing of information, the speed of the information, the better analytics a particular investor has above a benchmark or market return. This market return benchmark, as you know, is called Beta. Passive investing can only earn the market return, although there's a new-fangled concept called smart Beta, which we'll get to later in the course. Active investing is attractive if you think managers can beat the market or have skill, which again, most of them don't, over time and after fees and transactions costs. The manager also has to let you participate in the investment, which is difficult for some investments like hedge funds and private equity. The challenge of beating the market, of course, conceptually, is that the managers who so-called have the skill, the intelligence, the speed, the resources, and so on to beat the market then turn around and hand it to us, especially in other fees. It defies rationality in the eyes of some. On the other hand, there is evidence that some managers may have what we call persistence in their Alphas. The real question ultimately will be, whether we ourselves have the Alpha or we ourselves have the ability to find those who have the skill to generate Alpha, and finally, whether that's both in the investment world in general and the ESG subcomponent. This notion of active investment usually requires some additional analysis, whether it's quantitative or fundamental. It might be better suited to investors and styles that incorporate it, including smart Beta styles. Fundamental analysis means looking under the hood of an investment of security or a company, to make judgments about its quality or its pricing in the market as an investment. This requires paying for information, including hiring people to analyze it, and as you may have heard, they often get paid quite well. All of this can increase costs to the investor. The reality is that many funds, strategies, and investors use both inclusion and exclusion approaches. Some lay on top of the activist approaches, or actively engage with companies, or even just vote their opinions using the right to vote as owners of corporate shares, or as we might say, positive and negative screening. If cleverly done, this can be a strong way to keep the most socially objectionable securities or investments out of a portfolio, and put in the most attractive, from an ESG and/or financial perspective. The idea of combining both, may allow not only for the most sublime notion of customization, but also the idea that we can perhaps try to avoid the binding constraints that we have when we try to take a purely exclusionary approach. It also allows tactical overlays in an otherwise passive portfolio. A tactile overlay is a way of investing that moves into, or as we say, tilts towards certain investments at certain periods that might be interesting to investors. For example, if an investor has an opinion that the energy industry may be at risk because of a global macroeconomic cycle, they may want to tilt especially away from carbon producers or oil producers. Screens can be designed to optimize a particular type of social return, or financial return, as an investor might ultimately desire. Also, from the perspective of those who are concerned with meeting investor demand, the combination of exclusion and inclusion may be easier to market to investors.